JPMorgan Equity Focus ETF JPEF

We have qualitatively reviewed this strategy and reaffirmed its Process and People ratings. JPMorgan US Equity Focus has the backing of a strong research platform, but uncertainty around the evolving portfolio management team, including the March 2024 announcement that Jack Caffrey will assume control of the value sleeve in early 2025 from the retiring Jonathan Simon, makes it difficult to embrace. The following text is from Aug. 7, 2023.

This concentrated offering leans heavily on two highly successful and experienced managers, though one is retiring soon and another is in the latter stages of his career. Tim Parton and Jonathan Simon split the strategy’s assets, the former overseeing a growth sleeve and the latter a value sleeve. (Eytan Shapiro manages a small sleeve of small-cap stocks in the U.K. closed-end vehicle). They’ve done a good job over their joint tenure, which began with Parton’s addition in 2017, though Simon’s record dates back much further. Both have strong records on other U.S. equity strategies, too. However, Parton’s pending retirement in 2024 has thrust a newcomer to large caps into the spotlight. Felise Agranoff will assume Parton’s responsibility for growth investments, and while she has worked with Parton on other strategies, most of her background is in small- and mid-cap stocks. She’ll now be tasked with steering a very concentrated sleeve of about 20 large-cap growth stocks.

Jonathan Simon remains anchored as the value-equity decision-maker, though he is likely inching toward the tail end of his long career. Partly to address the eventual need for succession, J.P. Morgan named Dan Percella as comanager in 2022. Percella has a history as comanager of the highly successful JPMorgan Small Cap Equity VSEIX U.S. mutual fund but, similar to Agranoff, doesn’t have stand-alone large-cap experience. With Simon still firmly entrenched, Percella remains in a passive role for now but will likely ramp up as time goes on.

The managers run separate sleeves but communicate and collaborate regularly on potential trades, portfolio construction, and rebalancing between the sleeves. Such teamwork comes naturally to Parton and Simon, who’ve worked at J.P. Morgan for over 30 years each, but may not be as second-nature once Agranoff comes aboard. This strategy’s concentration in about 40 total stocks only magnifies the stakes, with untested managers on the horizon.

Standing in the managers’ favor is the backing of a deep and accomplished research platform that powers many Morningstar Medalist funds. The managers have a good set of tools, but it remains to be seen how the newcomers fare.

A concentrated framework reliant on two untested managers earns an Average Process rating. The following text is from Aug. 7, 2023.

Stock selection looms large for this focused portfolio. It is an amalgamation of the highest-conviction picks by Jonathan Simon from his JPMorgan Value Advantage JVAIX portfolio with Tim Parton's top bets from his JPMorgan Growth Advantage JGASX portfolio. (Eytan Shapiro oversees a small slice of assets invested in small caps in the U.K. closed-end vehicle, which can also employ modest leverage.)

Simon applies a mild value style, preferring attractively priced quality stocks combined with some opportunistic positions. Parton targets companies with quality franchises and strong market positions and typically builds a high-growth portfolio. Each sleeve can hold only 10–20 stocks. The managers run their sleeves autonomously but have regular discussions about the overall portfolio and its exposures. The value and growth allocations are driven by bottom-up convictions and are typically balanced but can move in a 40%–60% range. They can allocate capital to one another when they lack strong convictions or when they’d like to rebalance the overall portfolio.

Although the formula has worked well for Parton and Simon, who’ve known each other for decades and are highly experienced investors, it may not be as natural for incoming manager Felise Agranoff and potentially Dan Percella down the road. Both managers lack substantial large-cap investing experience and time working with each other. A concentrated framework only raises the stakes, making the process difficult to embrace at this time.

Despite a fairly balanced allocation between the growth and value sleeves over time, the portfolio’s blend of the highest-conviction value and growth ideas has led to a portfolio that has shown strong growth tilts at times and predominantly resided in the growth column of the Morningstar Style Box. The growth sleeve has become more diversified and its overweightings more modest since Parton's arrival in 2017, though. He also positioned the portfolio more conservatively than in the past, trimming exposure to high-growth stocks and thereby moving the portfolio into blend territory. Because there isn’t an automatic rebalancing scheme, as growth stocks outperformed over the past decade, their share of assets grew over time. However, the managers can rebalance as they see fit, which they did in 2020 toward the value portfolio and in 2022 toward the growth half.

As of June 2023, familiar large-cap growth stocks stood at the top of the portfolio. Microsoft MSFT took up 7% of assets, while Apple was a 5.7% weighting. The portfolio’s stake in such tech stocks increased rapidly in 2023 (partly due to appreciation), as the overall tech weighting rose from under 20% to about 26%. Financials are a persistently large portion of assets and represented about 17% as of June. These stocks typically lean toward a value style, which is under Jonathan Simon’s purview.

While the managers can hold between 20 and 40 stocks, the portfolio has stayed at 40 since the start of 2018.

Uncertainty surrounding an evolving portfolio management team leads to an Average People rating. The following text is from Aug. 7, 2023.

Two new faces became named comanagers in 2022. Felise Agranoff and Dan Percella joined veteran managers Jonathan Simon and Tim Parton and figure to represent the future for this offering. Agranoff will succeed Parton, who will retire in early 2024. She is a logical successor in that she has worked alongside Parton for over a decade as both an analyst and comanager on JPMorgan Mid Cap Growth HLGEX and JPMorgan Growth Advantage VHIAX. However, she doesn’t have much experience investing in large-cap stocks nor does she have a stand-alone track record. Retirement isn’t imminent for Simon, but the thought of a future without him isn’t far away either, as he has worked at J.P Morgan for over 40 years. However, to plan ahead, the firm named Percella as comanager in 2022, and he’ll likely succeed him when the time comes. Similar to Agranoff, Percella has a history in smid-cap stocks but not large caps.

Supporting the managers is a deep team of analysts and other portfolio managers whose insights can affect this portfolio. J.P. Morgan’s core/value research team stands over 20-strong and is filled with tenured analysts, about half of which have spent at least a decade with the firm. Dedicated analyst teams on both the growth and value sides are an additional resource.

J.P. Morgan is a well-resourced, diligent, and responsible steward of client assets. Investment teams are seasoned and stalwart, especially in equity and fixed income, the latter of which has successfully undergone substantial transformation in recent years. The firm offers competitive compensation that is aligned with fundholders and shows strong retention at senior levels of the organization. It demonstrates a culture of constant innovation and willingness to evolve. For example, J.P. Morgan recently expanded its investment committee process through which senior leaders review various teams and strategies, and it continues to develop proprietary portfolio management and risk oversight tools. Some funds still face high fee hurdles, but the firm has generally lowered expenses as it has grown.

The firm isn't without its complications. J.P. Morgan's product offering is extensive, and some areas need improvement. For instance, its multi-asset business has faced some challenges as a result of complex investment processes. The firm continues to build out its footprint in China, but its efforts there remain unproven. Although not every strategy is the best in its class, J.P. Morgan remains earnest in the pursuit of excellence, and investors are well-served.

However, it trailed the Russell 1000 category benchmark by 0.7 percentage points.

The strategy has excelled during the first seven months of 2023, gaining 24.2% versus 20.7% for the benchmark index. An overweight position in graphics/AI chip leader Nvidia NVDA contributed most heavily to results as the stock gained over 200% during the year to date. Other top contributors included Palo Alto Networks PANW and industrial company Quanta Services PWR.

It is difficult to predict how the strategy may perform in the future given that its weighting to the growth or value sleeves can differ. For much of the past decade, growth stocks performed well, and the portfolio’s growth sleeve was allowed to appreciate, such that it carried more weight and influenced the overall fund’s performance profile. A similar phenomenon could happen toward value or reemerge toward growth. Over the very long term, the style differences should even out some, leaving stock selection as the key driver of results.

Based on our assessment of the fund’s People, Process, and Parent Pillars in the context of these expenses, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Medalist Rating of Neutral.